One question I am asked regularly is How do you pay off debt, in particular mortgage or large loads, off quickly or why should you do it at all?
My mission for this blog is help others work towards financial and time freedom, and that means putting your money to smarter spending, smarter saving and then making sure you do some smarter living along with it.
These are my 6 top strategies that I believe will help you pay off your mortgage quicker than the bank hopes, and help build your assets.
// Why should we pay off our mortgage or large loans quickly?
We all need a home or roof over our head, end of.
Whether you are still saving to get that deposit to get your first home or you have been a home owner for some time, all these strategies will really help.
Loans & Mortgages are very different from lines of credit, such as a credit card.
They use a strategy called Amortization Scheduling so that the banks make as much money from you at the start of the loan, knowing that most people with a mortgage or loan might pay it off completely before the end of the term (when the amount is smaller) or in some cases default.
If you default on the loan, this means that you cannot pay it and the bank lose their way to get that money back or make interest/loan charge payments from you.
Amortization schedules are a way that the banks devised to make sure they avoid that risk of less money from you as possible.
A great video to explain the concept of Amortization can be found below:
So next, I will tell you how I use my money wisely with my mortgage to make sure we pay as little as possible in those interest payments.
This means having a goal to pay off the loan or mortgage as quickly as we can, but using the cash flow as wisely as possible.
// Pay MORE than the Minimum Repayment ALWAYS – 10% RULE
I should say that if you follow my Budget planning videos before, you will know that we apply a 10% additional payment to our Mortgage and Car payments, so that we will pay those off earlier than forecasted but also it allows a buffer if we needed to remortgage to a lower monthly amount if we were unemployed for any reason – and not lose our home!
You can find a few posts in particular about our Budget Style – I call it the 80/20 Budget – here.
The 10% rule means that we commit to paying 10% extra over the top each month of the minimum monthly repayment amount.
With this simple strategy, that often isn’t too far to find that extra small amount of money, we end up making more than 1 extra payment on our mortgage each year.
That extra payment is going towards the PRINCIPLE of the mortgage, rather than paying off interest due, so reducing our loan amount outstanding.
This in turn means our interest value total for the mortgage drops, saving us money.
A simple 10% overpayment can take a 25 year mortgage down to 22 years without much effort at all.
Apply this simple technique wherever you can with any form of debt, as long as you don’t face penalties for doing so.
// FIX RATE that mortgage where you can
Get a fixed rate loan or mortgage for as long as possible – protect yourself from standard mortgage interest rate hikes but also allow you to maintain your budget.
There might be penalties or restrictions for over-payments, so ensure you are within the limits and it makes financial sense to have that loan/payment option.
In the UK most banks will allow you to have a long term mortgage, say 25 or 30 years, but set the start period to a fixed interest rate.
If you don’t take up that offer then your mortgage payments will be subject to whatever the Bank of England interest rate is that particular month, and this will be noticeable higher than having a fixed rate mortgage for a few years.
With that monthly amount fixed, you then can free up as much money to make overpayments into the principle due.
// Throw EXTRA cash at it when you can
Throw any Lump sums you can at it – think tax rebates, think yearly bonuses from work, think side hustles, think about the months when you don’t pay Council Tax in the UK etc.
Get the buzz from seeing that money drop and your loan length of time dramatically drop too, meaning you can live without the payment sooner.
Make use of money mortgage tools out there such as Moneysavingexpert that allow you to estimate the amount you will save off your money if you pay that extra cash to it, rather than save for home improvements or a small holiday.
I love the comparison tool at https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator
// Shop around for the best deal when you can
Shop around for a better deal once in a while, at least every year or minimum when you are approaching the end of your fixed rate term.
Interest rates can improve so make sure your mortgage or loan is the best that the bank/company can offer.
You can easily switch if you find a better deal somewhere else.
Your mortgage tends to be the largest amount of debt you will owe in your lifetime, so be sure to be smart with it.
// Do the 7 Day Autopilot Money Challenge to find extra incomes
Take part in the 7 day challenge and THROW that extra money at the debt.
Do this at least every year or whenever you feel your money spending habits have slipped into bad habits.
I created this free course book to help people look at their budgeting style right now, and see where there is potential to use money for a better purpose.
It is never about doing with less, but doing more with that hard earned money.
// Think about your Long Term Money Goals
I take what I say and preach on this blog about creating a life of financial freedom and security, to create the balance of time and lifestyle of your dreams, very seriously.
Our family are working towards that very goal, and we are on target to hit it within the next 10 years, to retire early and live off our side businesses and investment increases.
In fact, with the power of compound interest and extra hard work than normal – it might be even sooner than that!
Our family knows the exact amount of money in Investments we need to reach in order to live off the interest payments indefinitely, and it isn’t rocket science, and would pay for everything including our mortgage payment if we needed it to.
For any financial goal, whether it be to pay off debt like we have (we paid off £22k of credit card debt in the past few years alone with these strategies learnt) once you have the exact amount to work towards it will start to become reality as you take action towards it.
// Looking to start improving your finances?
Be sure to check out my Household Finances kit below as a great starting point to help budget and plan for your financial goals ahead.